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Is Deere & Company's (DE) Guidance Too Conservative?

A look at the latest USDA crop production and price forecasts, and what the numbers suggest about Deere's guidance for 2015.

Investors in farming machinery giant Deere & Company(NYSE:DE) will be interested in the latest crop production and price forecasts from the United States Department of Agriculture. Let's dig into the numbers from the USDA crop production report and, in doing so, compare its forecasts with Deere & Company's expectations. Might Deere's guidance for 2015 have been conservative?

Source: Deere & Company

Deere & Company's forecastsBefore delving into the details of the USDA reports, let's take a look at Deere's guidance. In a nutshell, Deere's management is forecasting a 15% drop in net sales in 2015. Net sales in its core agriculture and turf segment are expected to be down 20%, with a whopping decline of 25%-30% forecast for its U.S. and Canada retail sales within the segment. The reason? Crop prices, and therefore farmers' incomes, are expected to decline in 2015 -- not good news for anyone selling to the farming industry.

However, Deere's forecasts may prove to be conservative. For example, AGCO Corporation forecasts a sales decline of only 12%-14% in 2015. Moreover, the recent USDA reports suggest that Deere's forecasts might prove to be a little too pessimistic -- suggesting some upside for Deere in 2015. After all, Deere's management is surely basing its sales forecasts on its assumptions for crop pricing and farmers' income in 2015.

Acres harvested, yield per acre, and priceFirst, let's compare Deere's forecast for acres harvested versus the most recent USDA forecast. Simply put, a large amount of harvested acreage usually means a large supply -- bearish for crop prices and bad for Deere.

In general, the USDA's forecasts look a little more bullish (the numbers are lower, suggesting lower supply) than Deere's estimates. Of course, harvested acreage is only part of the story. Crop yields have been very strong (helping create high supply) in recent years, partly because of exceptional weather. However, Deere's management believes that just "normal" weather in 2015/2016 could see crop prices rise, as crop yields might not be as strong as in recent years.

Here is Deere's 2014/2015 crop yield forecasts versus the current USDA estimates. A lower number implies lower supply, so crop prices might be expected to rise -- usually good news for Deere if accompanied by a rise in farmers' income.

Deere's forecasts for corn and wheat yields are a bit higher than the current USDA estimates -- indicating that Deere expects more corn and wheat supply than the USDA does. So, what does it all mean for the (all-important) price forecasts?

Price forecasting is a complex mix of factors such as acreage harvested, yield, demand, stocks in storage, end demand, etc. -- much of which is contingent on the weather. Indeed, predicting crop prices has never been easy, and it's definitely not an exact science. With that said, the latest USDA crop price forecasts suggest an improving outlook for crop prices. The USDA increased its U.S. price forecast for each crop, with the exception of cotton (flat).

Moreover, readers should note that Deere's corn price forecast is at the low end of the USDA range. Meanwhile, Deere's wheat and soybeans price forecasts are below the bottom end of the USDA ranges, with only Deere's cotton price forecast exceeding the USDA figure.

What does it mean for Deere investors?All told, the latest USDA data looks positive across the board for Deere investors. First, the USDA increased its U.S. price predictions for corn, wheat, and soybeans -- good news for farmers and Deere. Second, Deere's U.S. crop pricing assumptions look light compared to the USDA's. Since Deere's management is almost certainly using its price assumptions to produce its agricultural machinery forecast, investors have cause to think that Deere's sales assumptions for 2015 could be a little too conservative.

Lee Samaha has no position in any stocks mentioned, but having recently inherited an orchard, he is learning an awful lot about farming. As such, any bright spark emailing/commenting with a good idea on what he can do with 10 tons of apples might just win themselves a bottle of apple brandy/rakija/palinka. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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